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SBI: Burdened with provisions - Views on News from Equitymaster
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SBI: Burdened with provisions
Jul 26, 2008

Performance summary
  • Interest income grows by 21% YoY in 1QFY09, partly impacted the reversal of interest charges on waived agricultural loans to the tune of Rs 270 m.

  • Total agricultural waiver to the tune of Rs 35.8 bn

  • Net interest margins remain drop to 3.0% in 1QFY09.

  • Provisions increase nearly 9 fold (872% YoY) due to investment provision, provisions for wage revision and pension fund.

  • Cost to income ratio drops sharply to 45% in 1QFY09 from 56% in 1QFY08.

  • Capital adequacy ratio at 12.9% at the end of 1QFY09; net NPAs at 1.4% (1.6% in 1QFY08).



Rs (m) 1QFY08 1QFY09 Change
Interest Income 110,905 137,992 24.4%
Interest Expense 68,891 89,815 30.4%
Net Interest Income 42,014 48,177 14.7%
NIM (%) 3.3% 3.0%  
Other Income 11,385 24,039 111.1%
Other Expense 29,785 32,592 9.4%
Provisions and contingencies 1,594 15,495 872.1%
Profit before tax 22,020 24,129 9.6%
Tax 7,763 7,721 -0.5%
Profit after tax/ (loss) 14,257 16,408 15.1%
Net profit margin (%) 10.3% 11.9%  
No. of shares (m) 526.3 634.8  
Book value per share (Rs)*   772.5  
P/BV (x)   1.9  

What has driven performance in 1QFY09?
  • Advances leveraging CASA strength: Leveraging on its strength in low cost deposits (CASA) at a time when most banks are grappling with higher interest rates, SBI made an appreciable effort to stall the loss of market share in advances (15.6% in 1QFY09) and deposits (15.4%) in 1QFY09, which had been falling sequentially until early FY08. The growth in deposits was driven by low cost deposits. The fact that the bank has presence across all geographies including rural and semi-urban areas and is increasing its footprint in the international markets proved particularly beneficial this year, as it helped the bank tap the international and SME assets. In the retail segment, home loans (comprising over 51% of the bank’s retail advance book) grew by 17.4% YoY, auto loans by 41.3% and education loans by 45.9% YoY in the last 12 months.

    Balancing act…
    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Advances 3,448,340   4,483,270   30.0%
    Agriculture 351,731 10.2% 384,758 8.6% 9.4%
    Retail 741,393 21.5% 956,135 21.3% 29.0%
    Mid corporates 882,775 25.6% 1,154,581 25.8% 30.8%
    Large corporates 1,472,441 42.7% 1,987,796 44.3% 35.0%
    Deposits 4,496,600   5,618,570   25.0%
    CASA 1,846,304 41.1% 2,352,495 41.9% 27.4%
    Term deposits 2,650,296 58.9% 3,266,075 58.1% 23.2%
    Credit/Deposit 76.7%   79.8%    

    While the net interest margins (NIMs) have been partially impacted by the amortisation premia on Investments (as per the RBI’s new guidelines), the waiver of interest on agricultural loans has also had an impact.

  • Costs taper down:The operating costs for the bank increased by only 6.6% YoY in 1QFY09. As a result, the cost to income ratio has dropped from 56% in 1QFY08 to 45% in 1QFY09. Going forward, we see this ratio moving up to 52% as the bank will set up new branches in FY08 and recruit 20,000 new employees. Around 6,000 employees are expected to retire annually for the next couple of years.

  • Delinquencies aided by write-backs:SBI did not feel the heat on its NPAs with net NPAs falling to 1.4% of advances from 1.6% in 1QFY08 due to provision write back of Rs 2.5 bn. The credit card subsidiary of the bank, SBI Cards, is in losses with high NPA levels (16.3% in FY08, among the highest in the industry).

What to expect?
At the current price of Rs 1,448, the stock is trading at 1.1 times our estimated FY11 consolidated adjusted book value. The bank has launched the reverse mortgage programme that is expected to do well, given its widespread rural and semi-urban presence. Although we anticipate lower growth and muted margins in the near term, the bank, given its balance sheet size, penetration and the possibility of merger with associates remains a preferred play for the long term.

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